Reducing the wages to get under the high income threshold? Will it avoid an unfair dismissal claim?

In Unfair Dismissal Applications – an employee must demonstrate their annual rate of earnings at the time of dismissal were below the high income threshold prescribed by the Fair Work Act 2009 (Cth)[1] in order to be protected from unfair dismissal. The current high income threshold (applicable to all dismissals taking effect after 1 July 2020) has been set at $153,600.00. The exception to this rule is if an employee can demonstrate they were covered by an award or enterprise agreement at the time of their dismissal.

Due to the impacts of COVID-19 on their businesses, many employers and employees have mutually agreed to salary reductions in an effort to maintain employment. Nonetheless, the reduction of salaries may carry some unintentional consequences for employers. One of these consequences was recently explored by the Fair Work Commission in the matter of Stringer v I Step Communications Pty Ltd[2] (The Application) where an executive level employee (previously paid above the high income threshold) who agreed to a salary reduction was held to be a person protected from unfair dismissal (and allowed to continue her claim). 

What happened in the Application?

The Fair Work Commission considered the approach set out in the Full Bench decision of Zappia v Universal Music Australia Pty Ltd T/A Universal Music Australia[3]. The Full Bench decision made it clear an employee’s annual rate of earnings (for the purposes of determining whether an employee exceeds the high income threshold) is calculated by reference to their annual rate of earnings at the time of dismissal (as opposed to an average of earnings over previous months of employment).

The employee in the Application was paid an amount of $165,017.00, however her subsequent acceptance of a salary reduction (following a downturn in business caused by COVID-19) meant her annual salary was reduced to $128,095.14. This placed the employee under the high income threshold.

The employer in the Application restored the employee’s salary immediately prior to her dismissal (which placed the employee above the high income threshold). It was noted by the Commission the employee was the only person to have their salary restored by the employer.

The employer argued the employee’s salary exceeded the high income threshold at the time of dismissal, however this argument was rejected by the Commission which stated “I regard the action of the Respondent in increasing the Applicant’s salary on the day of her dismissal…as providing a fragile basis on which to ascertain the Applicant’s annual rate of earnings”. In practical terms, the Commission made a finding the employee would have remained on her reduced salary if she had continued to remain employed. It further stated “To find otherwise would allow for the manipulation of the Applicant’s salary by the Respondent with the effect of denying the Applicant a right to challenge her dismissal”.

(our emphasis added)

Practical guide for employers

If you are an employer who has reduced the salary of employees as part of your measures to keep your business viable, we suggest identifying any employees who were previously paid above the high income threshold (i.e. $153,600.00) prior to the effects of COVID-19 on your business and determine whether they are now paid below the high income threshold. If there are employees who fit within these circumstances, these employees may now be eligible to make an unfair dismissal application (if their employment is terminated). This will include situations surrounding the testing of whether a redundancy is genuine.

We suggest reviewing the considerations of an unfair dismissal application (e.g. procedural fairness requirements and valid reasons) prior to making any decisions to dismiss these employees. Of course, we are more than happy to help you in assessing the risks involved.

Lessons for employers

We wish to make it clear the high income threshold strictly applies to unfair dismissal applications and does not apply to general protections applications. An employee is eligible to make a general protections application regardless of the wage/salary they are receiving.

Employees who exceed the high income threshold do not usually have an avenue of challenging the validity of their dismissal (in the sense of a valid reason proportionate to conduct or performance issues) or the fairness of their dismissal (such as whether warnings were issued or whether opportunities were provided to respond to allegations). The exception to this general rule is if an employee can demonstrate an award or enterprise agreement applied to them at the time of their dismissal. Of course, employees who exceed the high income threshold can still make a general protections application, however the legal considerations for the latter are substantially different to that of an unfair dismissal application.  There are also applications potentially in play for example:

  • Breach of Contract
  • Reasonable notice
  • Discrimination

In practical terms, the Application suggests there are now additional risks for employers to consider if they intend on dismissing an employee who was previously paid above the high income threshold but has subsequently agreed to a reduction in salary (resulting in their earnings falling below the threshold).

The Application suggests merely reversing a reduction in salary is unlikely to disqualify an employee from making an unfair dismissal application.

If you are an employer who is considering terminating such an employee, we offer an obligation free consultation – please call +61 (07) 3876 5111 to arrange an obligation free consultation to discuss your inquiries and we will do our best to provide a helpful, practical solution.

Written By

Jonathan Mamaril

Principal

NB Lawyers – Lawyers for Employers

jonathanm@nb-lawyers.com.au

+61 (07) 3876 5111

Assisted By

Dan Chen

NB Lawyers – Lawyers for Employers

danc@nb-lawyers.com.au  

+61 (07) 3876 5111

About the Authors

Jonathan Mamaril leads a team of handpicked experts in the areas of employment law and commercial law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability.  With a core value of helping first and providing practical advice, Jonathan is a sought after advisor to a number of Employers and as a speaker for forums and seminars where his expertise is invaluable as a leader in this area as a lawyer for employers.

Dan Chen is a lawyer at NB Lawyers, the lawyers for employers, and specialises in employment law. Dan is passionate about assisting business owners, small and large understand their obligations under Australia’s complex workplace relations system.


[1] Section 333 of the Fair Work Act 2009 (Cth).

[2] [2020] FWC 3508

[3] [2012] FWAFB 6108

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